Liquidity Planning

What is liquidity planning?

Liquidity planning is the forward calculation of all of a company's receipts and payments for the coming weeks and months. It is also widely called cash flow forecast. Its aim is to secure solvency at all times and to identify bottlenecks early enough that there is still time for countermeasures. It resembles a bank statement written in advance: every expected payment appears in it with date and amount. The planning is updated continuously and regularly reconciled with the actual account balances.

Liquidity planning is an operational steering instrument of management. It is prepared by the finance function or by an external finance lead (CFO) on the basis of accounting, open invoices and contracts. Banks require it for credit decisions, investors in the preparation of a round, and in a crisis it is the basis of any statement about continuation. It differs from the multi-year cash flow projection in the financial model through its shorter horizon and its accuracy at the level of individual payments. Liquidity planning answers whether the money lasts for the next weeks and months; the cash flow projection, how much capital is needed over several years.

Structure of a liquidity plan

Liquidity plans generally follow the direct method: every payment is recorded with its amount and expected payment date. From opening balance, receipts and payments results the closing balance of the period, which is at the same time the opening balance of the next. Alongside are the callable credit lines and a defined minimum liquidity that is not to be breached.

• Receipts: customer payments by due date and actual payment behaviour, prepayments, grants, tax refunds and financing inflows, each only on the expected date of receipt.
• Operating payments: wages and salaries with wage tax and social security contributions, suppliers, rent, software and service providers, VAT and advance payments of income taxes.
• Investment and financing payments: acquisitions, interest, repayments and lease instalments.

The data come from the list of open customer receivables and supplier invoices, the headcount plan, the tax calendar and ongoing contracts such as rent, leasing and software subscriptions. For the later weeks, empirical values take the place of individual invoices, for example the average receipt per euro of revenue after 30, 60 and 90 days.

Time horizons and rolling updates

13-week planning

The 13-week plan covers a quarter week by week. It shows low points within a month that a monthly view conceals. Social security contributions fall due on the third-to-last banking day of the current month, wage tax and VAT, with monthly filing, by the 10th of the following month; with a permanent extension of the deadline (Dauerfristverlängerung), VAT shifts by one month. Large customer payments, by contrast, often arrive only in the following weeks. In tense situations, in discussions with banks and in restructurings, the 13-week plan is the usual format.

Rolling liquidity planning

The weekly planning is followed by a monthly plan over 12 to 24 months. It takes over the assumptions of the budget and the financial model, translates them into payment dates and shows the runway to the next financing. Rolling means: with every week or month that has elapsed, a period is added at the end, so that the horizon stays the same length.

Budget vs actual reconciliation and scenarios

Before each update, the planned values of the elapsed period are compared with the actual payments. Recurring deviations show which assumptions have to be corrected, usually the payment behaviour of customers. In addition to the base case, at least one cautious case is calculated, for example with a major customer paying 30 days late or a financing that is postponed.

Legal framework

The law prescribes no particular form of liquidity planning. Under Section 1 of the German Act on the Stabilisation and Restructuring Framework for Businesses (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG), however, the managing directors of a GmbH (German limited liability company) must continuously monitor developments that could endanger the company's continued existence. If they identify such developments, they take countermeasures and inform the supervisory bodies. Without ongoing liquidity planning, this duty of early crisis detection can hardly be fulfilled in practice.

In insolvency law, the planning is the arithmetical basis of several tests. Whether a gap is merely a temporary payment bottleneck or already illiquidity (Zahlungsunfähigkeit, Section 17 of the German Insolvency Code, InsO) is shown by a financial plan for the following three weeks. The going-concern forecast for over-indebtedness covers twelve months (Section 19(2) InsO), the test for imminent illiquidity generally 24 months (Section 18(2) InsO). A monthly plan over 24 months covers both periods. The standards of these tests are explained in the entry on liquidity; their application in an individual case is a task for legal advice.

Relevance in financing and company acquisitions

In preparing a funding round, liquidity planning evidences the runway and thus the point at which the process has to begin. Investors read from how closely actual results followed the plan in past months how reliable the company's planning is. Lenders often require monthly liquidity reports and tie financial ratios (covenants) to minimum balances.

In company acquisitions, buyers regularly request the current planning in due diligence, the review of the company before signing a contract. Between signing and closing, weekly liquidity reporting serves to monitor compliance with the ordinary course of business and agreed minimum balances.

Worked example: 13-week liquidity planning with a low point

A company starts a month with EUR 520,000 in its account and has set a minimum liquidity of EUR 300,000. The 13-week plan shows for the first four weeks:

• Week 1: 520,000 + 90,000 receipts minus 120,000 for suppliers, rent and software = EUR 490,000
• Week 2: 490,000 + 100,000 minus 130,000 for VAT and suppliers = EUR 460,000
• Week 3: 460,000 + 80,000 minus 355,000 for the payroll run, interest and repayment = EUR 185,000
• Week 4: 185,000 + 350,000, of which 250,000 from a major customer, minus 70,000 for suppliers = EUR 465,000
• Monthly view: 520,000 + 620,000 receipts minus 675,000 payments = EUR 465,000

The monthly view shows a closing balance well above the minimum liquidity. The weekly view shows that in week 3 the balance is EUR 115,000 below it. If the major customer pays 30 days later, week 4 also ends at 185,000 + 100,000 minus 70,000 = EUR 215,000. Management can secure a credit line in good time or agree a part payment with the customer, instead of noticing the gap only on the day of the payroll run.

Distinctions: liquidity planning, cash flow projection and forecast

• Liquidity: solvency itself. The planning is the instrument that makes it visible for the future.
• Cash flow projection: the multi-year forecast in the financial model, usually derived by the indirect method from earnings and balance sheet changes. It measures the capital requirement over years, while liquidity planning secures solvency in the next weeks and months.
• Integrated financial planning: links planned income statement, planned balance sheet and liquidity plan. Its payment part sets the framework; operational liquidity planning refines it to weeks and individual payments, and its monthly values should agree with it.
• Forecast: the continuously updated projection of the financial year from actuals and current expectation. The liquidity forecast is the short-term, continuously adjusted part of liquidity planning.
• Free cash flow: a metric, the cash surplus from ongoing business after investments. It can be read off a plan but is not itself a planning instrument.

Common mistakes

• Invoice date instead of payment date. Anyone who enters receipts in the month of invoicing plans inflows too early by the length of the payment term.
• Tax and contribution due dates forgotten. VAT, wage tax and social security contributions fall due on fixed dates and in individual weeks tie up a large part of the balance.
• No budget vs actual reconciliation. Without comparison against the actual payments, wrong assumptions go unnoticed for months.
• Monthly values only. Month-end balances conceal low points within the month at which salaries or taxes fall due.
• Responsibility outsourced. Tax advisers and accounting supply data; the duty to monitor solvency remains with management.

Frequently asked questions

How often is liquidity planning updated?

The 13-week plan weekly, the monthly plan at least monthly. In tense phases or during a financing process, the monthly plan is also adjusted every week.

How accurate must liquidity planning be?

In the first weeks exact to individual payments, thereafter empirical values suffice. Decisive is less the accuracy of a single week than a small and explainable deviation in the budget vs actual comparison.

How does liquidity planning differ from the cash flow statement?

In direction. The cash flow statement explains the change in cash and cash equivalents in a past financial year. It is mandatory in consolidated financial statements under the German Commercial Code (Handelsgesetzbuch, HGB) and is structured according to German Accounting Standard No. 21 (Deutscher Rechnungslegungs Standard Nr. 21, DRS 21). Liquidity planning predicts whether the funds will last in the coming weeks and months.

Is there a template for liquidity planning?

Yes. Spreadsheet templates are offered by, among others, banks and chambers of industry and commerce (Industrie- und Handelskammern), often free of charge. The columns represent weeks or months. The rows begin with the opening balance, followed by receipts by source, payments by type and the closing balance, which carries over as the opening balance into the next column. At the end come credit line, minimum liquidity and the distance to it. More important than the template is maintaining it with actual payment dates.

Who is responsible for liquidity planning?

Management. The preparation can lie with the finance function or with an external CFO; the responsibility for monitoring solvency and for countermeasures cannot be delegated.

The Roemer Capital view

When Roemer Capital takes over a client's finance function for a period as fractional CFO, it sets up liquidity planning in two stages. A 13-week plan steers the ongoing payments, and a rolling monthly plan is linked to the financial model. In this way the runway in the planning and the assumptions given to investors agree.

During a financing process, Roemer Capital updates the planning weekly. Investors ask in due diligence for the budget vs actual comparison of the last months, and a plan whose deviations are explained supports the credibility of the entire financial model.